I recently got a letter from my Dutch bank saying how they
will start charging a negative 0.5% interest rate on certain amounts.
In any case, 0, negative 0.5%, it doesn’t look good! Let’s
look at other options!
Investing is pretty simple. Investing fundamentals are
always the same and it doesn’t really matter whether you are from Europe or
not. The most important investing fundamentals are:
Managing risk – be it through portfolio
diversification or knowledge (the more knowledge you have, the less risk you
can take as you’ll find the low risk/high reward investments)
Being realistic about what an investment
opportunity can fundamentally deliver and about its risk
Understanding the margin of safety concept – a
margin of safety means that whatever happens you do well.
Let’s apply these simple principles to the biggest investing issues and opportunities for Europeans. Here is the video, article continues below.
1) What am I already invested in as European?
Let’s reverse engineer investing from Europe and start from
what you are already long, already invested in, if you are from Europe. To
protect yourself from whatever might await Europe and the Euro in the future,
you might want to first diversify away from what you already have.
Most Europeans are legally obliged to put part of their
salary into a pension fund. Unfortunately, pension funds invest like pension
funds. They should offer a safe but small yield over time.
A look at the largest investments of my Dutch pension fund
ABP shows that I am long government bonds, some real estate in the Netherlands
and the largest global corporations.
Thus, most pension funds hold a globally diversified
portfolio and what we should expect from it is a small yield, hopefully above
inflation and management costs if we are lucky. But something should come out
of it at some point in time.
Your government – social security
Alongside your private pension fund, when you reach 60, 65
or even 67, if you are still alive, your government will probably give you a
pension in the form of social security.
However, demographics are not looking good in Europe due to
the aging population, government debts are piling and who knows how will Europe
look like in 20, 30, 40 years.
While things go well and are stable, all is fine, but when
things turn bad, reality might not meet your expectations. Greek pensioners
have not been happy with what has been going on there over the past decade.
We don’t know what will be the paying capacity of individual
European governments down the road, but that is something, alongside most
pension funds already owning government bonds, we are all long.
Home – possibly???
Further, you might be one of those that own a home. Therefore,
you might be long European real estate already.
But then again, your home isn’t likely to produce cash
flows, which is what you want to get from investing.
Euro – if you have some money to invest
And the last thing you are probably long, is the Euro, the
currency, sitting on your bank account, earns no yield and is surely losing
from 1% to 10% on inflation depending on what you are buying. If you are saving
for retirement or a home, the inflation rate is much higher.
The above basket of European investments consisting of
European bonds, stocks, government exposure, real estate and cash could be
considered simply being long Europe with no diversification. If a government
gets into trouble, bonds will follow and governments get into trouble when
economies slow down, thus the stocks you own would fall too. And, if
governments get into trouble, the Euro would too be in trouble and your pension
fund too, and even real estate might be hit.
We can say that we Europeans are pretty long Europe and
every investment is highly correlated, not diversified at all.
So, where to invest and what to do? I’ll tell you how am I
diversified and hedged (protected from downside) as a European living in Europe
and you’ll see how that fits your requirements, risk appetite and financial
The core of this article on how to invest from Europe will
be diversification and inflation protection. Given the environment, we can’t
know what will work and because of the money printing going on, inflation is a
2) European Stocks – or better to say businesses
When compared to what you get from your bank on your cash,
investing in stocks that represent a part of a business seems a very smart
thing to do. The Royal Dutch Shell stock gives you a high dividend yield but it
gives you also a risk, 100% related to oil.
Stocks are always very volatile because the majority of
people see it as a gambling place and not as an investment place. However, if
you look at it from an investing perspective, you can be very well rewarded
My message is simple, have part of your portfolio in good
businesses that will keep delivering over time. One example is the Visa video that I did or
many other stock analyses on my blog.
I’ll make an analysis about oil soon so please subscribe.
If you manage to not worry about stock prices, but focus on
the businesses that you own and the yield those businesses produce over time,
you’ll do good and much better than by keeping your cash in a bond or on your
3) Real estate – Europe and abroad
An option is to invest in is real estate, another asset
class that is still comparatively cheap. The naysayers will immediately say how
real estate prices can drop and you can lose your money. My answer is that it
is definitely a risk, but not a certainty like it is the case with your cash.
Plus, as it was the cash with stocks and the businesses you invest, the
question is whether you are investing in real estate like a speculation,
expecting it to go up, or you are investing in it for the cash flow it will
Real estate yields in Europe are still much higher than what
bonds offer and rents are usually adjusted up for inflation.
On top of the yield, given the ECB is printing money hand
over fist and it is impossible for them to stop printing because the European
economy, European governments and even the population is desperately in need of
free money, it is likely that the money supply will continue to grow and that
inflation will continue to be present within financial assets. So, owning real estate
is also a form of inflationary protection.
The money the ECB produces through bond purchases and
negative interest rates flows towards a higher yield – thus into real estate
and financial instruments like stocks.
The result of the above is that home prices in the
Netherlands have increased 35% in just 4 years while prices in Amsterdam surged
much more as there is limited supply within the canals and high demand thanks
to demographics and tourism.
Perhaps there will be some temporary downturns, but given
the ‘whatever it takes’ monetary policy, it is more likely to see real estate
prices double in the next 10 to 20 years than to see them fall. So, real estate
is a way to protect your wealth and get a yield.
I made a rational mistake of selling my real estate in the
Netherlands in 2019 but that was mostly for personal reasons as we took the
equity out to buy something new as we moved out of the Netherlands. More about
that in my real estate
video. We still have the cash, but it will hopefully be deployed during
Just a warning here, investing in real estate has its risks
and you really need to do it properly. If you do it properly, you treat it as
an investment and you don’t speculate. Thus, you focus on the yield from the
property and you are happy with it, over the long-term, you’ll probably do very
well. Also, keep in mind the 3 core rules when it comes to investing in real
estate: location, location and location. Add demographics, supply and demand
analysis, tourism, students etc. and you’ll get the picture of where to and
where not to invest.
And, real estate investing has another little perk.
4) Mortgages or loans (for whom do you think those low
interest rates are?)
Central banks are forced to keep interest rates extremely
low because governments and corporations are extremely indebted, especially in
old fashioned industries or countries where they try to do whatever to keep up
with growth stocks or emerging markets.
My brother is looking to buy his first home in the
Netherlands and the bank offers him an interest rate of 1.2% variable or a
1.47% fixed for 20 years. Those yields are insanely low where a fixed
rate mortgage might give you another hedge against possible inflation given
that your payments remain always fixed. If there is inflation of 5 to 10% in
the future due to loose monetary policies, imagine how would you feel owning a
20-year fixed mortgage of 1.47%? (unfortunately, available only is some
If you can borrow at 3% while the rental yield is 4% where
the rental yield will only go up while your payment remains fixed forever, to
me, that is a good risk versus reward investment opportunity.
Keep in mind there is always risk and you never know what
can go wrong. The key to lower your personal financial and investment risk is
to be diversified. Another way to diversify is to take a look at commodities.
Commodities are resources where many are of limited supply
while demand keeps on growing due to global economic growth. Global consumption
of materials just hit 100 billion tonnes and there is not sign that demand
will stop growing in the future.
Also, commodities should give you protection against
inflation. Many immediately think of gold, an asset class with special
characteristics but there are many other commodities you can invest in from
copper, palladium, nickel to fertilizers or salt.
Whatever might be the commodity that best fits your
portfolio, the key to understand is that commodities will always be volatile
and therefore one has to have a clear strategy before exposing a portfolio to
If I take the example of gold, it has been extremely
volatile over the past 10 years, going from below $1,000 per ounce, getting
close to $2,000 in 2011, falling down to $1,000 and going up to above $1,500
Perhaps the best strategy when it comes to commodities
portfolio exposure is a constant balancing strategy. Let’s say you put 10% of
your portfolio in gold, for example, and when it becomes 12%, you sell 2%. In
case it falls to 8% you bring it back up to 10% etc. Given the volatility of
the commodity, you’ll constantly get a return from trading and give balance to
your portfolio. In case gold is expensive while stocks are cheap, you might
want to use the proceeds from one to add to the other.
In any case, it is likely that over the long term, a commodity will do better than cash by just preserving its value. Here is my copper investing thesis.
I personally don’t have gold or other commodities but I have
businesses that produce them which is a way to combine being hedged with
commodities and owning a business.
Investing from Europe – diversify and always mind the
You cannot know what will happen, so you must always analyse
the risk and reward of each of your actions. It is highly likely the Euro will
continue to lose its value due to political issues, constant money printing,
the historical power of the dollar, the growth in other economies while
Europe’s demographics stagnate at best and most importantly; negative interest
rates and constant money printing.
We can only imagine how will European politicians and
monetary policy makers react when the first real economic issues hit the global
economy and push the European economy into a recession – I assume there is
going to be a lot of money printing. The best way is to be prepared where if it
happens you are ready, if it doesn’t happen, you are still ok as you own good
investments in the form of good real estate, good businesses and good
Now, don’t diversify just to diversify and buy whatever in
Emerging markets. Learn about your options and then invest in what you
understand that is better compared to what you have now in Europe and in case
Europe gets into a crisis, could be much better. Buying something, without a
margin of safety or without good fundamentals just for the sake of
diversification might be a costly thing to do. Remember, wherever you are, you
have to apply common sense to investing.
For more insights into how to invest, how to take advantage of the situation and not be taken advantage of – please subscribe!